Starting a small business is often an exciting journey, but the road to success can include challenging pitfalls. Navigating it all may be overwhelming — read on to learn how to navigate legal and regulatory hurdles that can derail your new venture.
Choose the right business structure
The way your business is structured will determine your level of personal liability. It also affects how you’ll pay taxes, as well as daily business operations. This makes it an important task when launching your own business. Here are the four main types of business structures, according to the Small Business Administration (SBA):
- Sole proprietorship: This simple structure is designed for single-owner businesses. While you won’t be obligated to register your business, you could be personally liable for debts incurred by the business. Your personal assets could also be at stake in the event of a lawsuit.
- Partnership: This option might make sense if there are multiple owners. There are several different types, but generally speaking, partnerships are simple to form, offer unique tax benefits and have few compliance requirements.
- Limited liability company (LLC): This structure provides a simple way to keep business and personal assets separate from one another. And as the name implies, it offers some degree of personal liability protection.
- Corporation: Corporations are owned by shareholders and provide the highest level of personal liability protection. However, they cost more to form and maintain.
If you fail to register your business, it will automatically be considered a sole proprietorship, which could leave you vulnerable to future legal issues.
Apply for an employer identification number (EIN)
An EIN is assigned by the IRS and used for tax purposes. Think of it as your business’s personal ID number. Once you have it, you can open a business bank account, apply for loans, file business tax returns, and seek business licences and permits. According to the IRS, you’ll need an EIN if:
- You have employees.
- Your business is structured as a corporation or partnership.
- You file an employment, excise or alcohol, tobacco and firearms tax return.
- You withhold taxes on income paid to a non-resident alien (excluding wages).
- You have a Keogh plan.
- Your business is involved in trusts, estates, real estate mortgage investment conduits, nonprofit organizations, farmers’ cooperatives, or plan administrators.
Secure the necessary licenses and permits
Your required business licenses will depend on the nature of your business and your state. Start by checking the SBA’s list of federal- and state-required licenses. For example, if you’re opening a bar, you’ll need a liquor license. Your state might also require special licenses to comply with rules related to things like health and safety. Be sure to check with your state to clarify what’s required. Operating without the necessary licenses and permits could lead to fines and put you in legal hot water.
Know your tax obligations
As a small business owner, you’ll want to stay on the right side of the IRS — and that means paying your taxes. That involves issuing W2s to employees (1099s to freelancers and contract workers) and filing an annual business tax return. Depending on your business, you might also have to pay:
- Estimated quarterly taxes
- Employment taxes
- Unemployment taxes
- Self-employment taxes
- Excise taxes
- Sales taxes
- Property taxes
Using accounting software or working with an accountant can make it easier to keep up with your tax obligations. It’s also wise to keep your personal and business finances separate.
Understand employment laws
Following relevant employment and labor regulations is critical. Doing so can protect your business from fines, penalties and lawsuits. Put these action items on your to-do list:
- Make sure you’re complying with federal and state minimum wage rules.
- Maintain workplace health and safety standards set by the Occupational Safety and Health Administration (OSHA).
- Offer health insurance if you have 50 or more employees.
- Provide leave to eligible workers as dictated by the Family and Medical Leave Act (FMLA).
- If you have at least 100 employees, you’ll need to report annual employee pay data to the U.S. Department of Labor and the U.S. Equal Employment Opportunity Commission.
Prioritize data security
Federal law requires companies to keep sensitive data secure. That can include everything from your employees’ Social Security numbers to your customers’ credit card information. As such, you’ll need to be aware of what sensitive information is moving in and out of your business, and take reasonable steps to keep it safe. This could be one of the most essential issues in navigating legal and regulatory hurdles. The Federal Trade Commission (FTC) suggests:
- Taking stock of what personal information your business is holding.
- Only holding onto what you need.
- Keeping this information in a secure place, which applies to both paper and digital files.
- Properly disposing of information that’s no longer needed.
- Creating a security incident plan.
Keep up with annual filing requirements
Your business structure and state might require you to file annual reports, pay filing fees or file articles of amendment if any key parts of your business change. Your state might also require you to pay a franchise tax. Note that this is different from income tax and sales tax. Some states impose a franchise tax, which gives businesses the right to operate in that state. The sooner you understand your state’s filing requirements, the better.
Consider getting business insurance
There are various types of business insurance, but they’re all designed to reduce risk for business owners. That could protect you from financial stress and lawsuits. Depending on your state, you may be legally required to carry certain forms of insurance. Small business insurance may include:
- General liability insurance
- Commercial property insurance
- Unemployment insurance
- Workers’ compensation insurance
- Business income insurance
- Disability insurance
- Commercial auto insurance
The right level of coverage for you will depend on your business and where it’s located. Business insurance is one of those things you purchase but hope you’ll never need. It can be especially important for businesses that are structured in a way that leaves their owners vulnerable to personal liability.
This may seem like a lot of information to keep up with, but once you have the proper systems in place, you’ll be glad to have them. As a small business owner, navigating legal and regulatory hurdles is a non-negotiable. Failing to do so could damage your business’ reputation and lead to irreparable financial damage.